(i) To answer questions from members of the public pursuant to Procedure Rule No. 10.
(ii) To answer questions from members of the Council pursuant to Procedure Rule No. 11
Minutes:
QUESTIONS FROM MEMBERS OF THE COUNCIL NO. 1
Under Procedure Rule No 11, Councillor J Faulkner will ask the Portfolio Holder for Assets and Finance, Councillor R Pritchard, the following question:-
“I am sure that the Deputy Leader of the Council has seen reports of the suspension of trading in the M&G Property Portfolio. Given the volatility of the market, what does the portfolio holder anticipate to be the possible consequences for our own property fund investments and what consequent action does he propose?”
Councillor R Pritchard gave the following reply:
Thank you Mr Mayor. I will provide a written answer to Councillor Faulkner in the morning.
WRITTEN ANSWER provided by Councillor R Pritchard
Firstly, it is important to note this fund is only marketed to retail customers and not to institutional investors like Councils.
Also, the rational for the suspension is being put forward as “unusually high and sustained outflows” which it puts down to Brexit worries and a retail downturn – I am informed that this fund has 37.5% exposure to retail property. No council investment exceeds 13% retail.
It needs to be stressed that the news about the suspension of trading does not mean that the fund is not sound - this type of investment is not liquid. It is dependent on sales of property to release funds for redemptions.
Several retail funds did the same thing around the time of the referendum vote in 2016, and this did not impact on those funds that are marketed to institutional investors.
While there is no indication that this will affect the Councils investments in property funds, Officers have already had an update meeting with one fund manager and are planning another meeting to discuss this issue, as well as the fund’s performance and what their outlook is for the sector and their fund.
This comes back to the basis of our investment view, not just about security, liquidity, yield, but first and foremost about appropriateness.
The Council has invested nearly £4m in 2 different property funds to date. Neither council investment property funds exceeds 13% retail.
As the member will appreciate, the council has the view that we will invest for the long term (over 10 years), appreciating that prices can both rise and fall in the short term, and that over that long term, given the cash rate outlook, their performance should outstrip returns from cash deposits.
When the Council went through the selection process, officers looked at things like the current fund structure, asking why it is so and how the manager may adjust this as market situations change etc.
As you will remember, the Council undertook a Property Fund Manager selection exercise during 2017/18, appointing Link Asset Services to provide support and advice in the identification and selection of suitable UK-focussed property funds.
At the outset, the Council was looking to engage with funds that had a broad remit of exposures to different property types, rather than being focussed on one particular area, such as retail.
The result of the process was to look to consider splitting investment across six funds to provide the Council with a range of approaches to property fund investment, diversification across a number of funds, rather than a concentration in only one or two options, as well as the ability to take advantage of entering a number of funds via the secondary market, whereby the Council would be purchasing units from investors looking to exit the particular fund, and may potentially gain access to a fund at a lower level of cost than via the primary route.
Given the uncertainty over Brexit, the Council has deferred further investments while the market settles which arguably has been the right strategy as, with many funds now trading at a discount, now might be the right time to invest further as the outlook is weaker than it has been, and investors may save on entry costs.
This way, there are savings in entry fees, the funds will continue to generate income that is some way in excess of cash rates and over the medium to long term of a full investment time horizon, the capital level should appreciate - improving overall performance & income.
We are receiving in 3% and 4.5% return on either fund so far.